DBRS Confirms HSBC Holdings plc at AA (high), Trend Remains Negative

DBRS has today confirmed the ratings of HSBC Holdings plc (HSBC or the Company), including its AA (high) Issuer and Long-Term debt ratings and its R-1 (high) Short-Term rating. The trend on all long-term ratings remains Negative, while the Trend on the Short-Term rating remains Stable.

Today’s rating action follows the release of HSBC’s H1 2009 interim results. The rating confirmation reflects DBRS’s view that HSBC’s underlying interim results were solid despite the global recessionary environment and overall difficult operating environment. For the half year ending 30 June 2009, HSBC reported a pre-tax profit of US $5.0 billion, which was down 51% from H1 2008. Further, for the half year, the Company earned an underlying profit of US $7.5 billion, excluding movements in the fair value of its own debt related to credit spreads. Importantly, first half 2009 net operating profits before loan impairment charges and excluding movement in fair value of own debt, increased slightly from the second half of 2008 to US $37.2 billion. DBRS views these results as illustrating the strength of the HSBC global franchise and the underlying earnings generation ability of HSBC, which enhances the Company’s ability to absorb losses resulting from the current difficult operating environment. This is further illustrated by the significant positive jaws achieved during the first half of 2009. HSBC generated a 17% increase in revenue as operating expenses decreased by 5% as compared to the second half of 2008. This solid underlying earnings power, which is generated by the strong diverse franchise, is a key factor underpinning the rating.

All business segments, except for Personal Financial Services (PFS), remained solidly profitable. Further, all geographic regions remained profitable with the exception of North America, which was the main drag on PFS. However, on a comparable period basis to H1 2008, all regions and customer groups, except Global Banking and Markets experienced a reduction in overall profitability. Global Banking and Markets achieved record profits during the H1 2009 of US $6.3 billion as market conditions improved in both developed and emerging markets. Losses continue to mount at HSBC Finance; however, the restructuring of this business continues to progress well. Given the reduced receivable book and the steps taken to stabilise this business, DBRS sees HSBC Finance as having a decreasing burden on the Group. Notwithstanding, given the near-term outlook for weak levels of economic activity around the globe, DBRS sees pressured underlying performance from the Company’s various regions for the near-term. The impact of this expected weakness is factored into the Negative trend on the Long-Term ratings.

The global economic downturn continues to drive the elevation in credit costs. Loan impairment charges increased 38.5% compared to H1 2008, to US $13.9 billion. Rising personal bankruptcies, unemployment and property price declines; especially in the U.S and U.K. resulted in loan impairment charges in PFS to remain elevated at US $10.7 billion in H1 2009. Given the ongoing environment, DBRS anticipates continued elevated credit costs in the second half of 2009, however, the reduced balance sheet and the ongoing seasoning in the loan book may provide some relief.

DBRS views HSBC’s enhanced capital position as sound. HSBC completed a US $17.8 billion rights issue during the H1 2009, which further enhanced its capital base. Moreover, despite the challenging environment, HSBC continues to generate capital from its operations. As a result, at 30 June 2009, the Company’s core Tier 1 ratio improved to 8.8%, the Tier 1 ratio improved to 10.1% and Total capital ratio ended 30 June 2009 at 13.4%. Liquidity remains solid. Customer advances-to-deposits ratio declined slightly to 79.5%, from 83.8% at year end 2008, owed to a 6% decrease in consumer loans and advances while customer accounts declined 1%.

The Negative trend reflects DBRS’s continued concern that, despite acceptable underlying performance, further economic weakening in the global economy will result in continued elevated credit costs, thereby exerting ongoing pressure on earnings. Moreover, the Negative trend reflects DBRS’s expectation that the global economic slowdown may pressure revenue generation ability over the near-term. While DBRS considers the Group’s solid earnings power a fundamental strength and a significant factor supporting the rating, the unprecedented weakness and the global recessionary environment may result in a weakening of HSBC’s sizeable pre-provisioning earnings generation ability and lead to earnings pressure. However, should recent signs of stabilization in global economic activity, albeit at lower levels, continue and underlying earnings generation be maintained the rating trend could revert to Stable.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.